Euro More Exposed to Inflation Data Than Many Expect

Talking Points:

• Dollar: FOMC Minutes Supply Bears with More Fuel
• Euro More Exposed to Inflation Data Than Many Expect
• British Pound Hits 4 Year Highs, Further Move Not BoE Dependent

Dollar: FOMC Minutes Supply Bears with More Fuel

Though it didn’t suffer the same bearish intensity endured Tuesday, the dollar nevertheless extended it tumble through this past session. The Dow Jones FXCM Dollar Index (ticker = USDollar) is now down four consecutive days and 1.4 percent. Amongst the majors, we see the uniform weakness versus fellow liquidity leaders (euro), equal standing safe havens (yen) and high-yield counterparts (Australian dollar). This slump suggests an innate struggle which directs us back to the retreat in rate expectations. Further feeding the drop in dollar and Treasury yields the FOMC minutes noted some concern that markets may assume a more hawkish Fed that what is intended. Hardly a revelation unless bears were looking for a reason to reinforce their view. Unless the Taper is halted, though, this slide has limited room to run.

See what I expect from the US dollar and its major pairs in today's Strategy Video.

Euro More Exposed to Inflation Data Than Many Expect

It is easy to evaluate the Euro on the performance of the EURUSD alone. Up three straight trading days and once again above 1.3850, this pair looks like it is backed by the motivation to make a second attempt on 1.4000. Realizing such a bullish target, however, requires far more robust participation from the euro. Much of the benchmark currency pair’s performance is the responsibility of the dollar and its unique weakness. For pairs like EURGBP, EURAUD or even EURCHF; we see little of that same conviction. The steady – albeit moderate – stream of capital flowing backing into the Eurozone for reserves diversification and speculative appetite for periphery yield wouldn’t be a strong enough motivator to offset a convincing bearing development. Ahead, we have a very serious test of conviction in the Eurozone. Economic surveys for Bloomberg, jobs figures (for Greece) and inflation data for the ‘periphery’ will tell us whether the weakest link in the chain necessitates stimulus.

British Pound Hits 4 Year Highs, Further Move Not BoE Dependent

GBPUSD closed at 1.6793 Wednesday – the highest level in over four years. This would be an impressive reading if it were a true reflection on the sterling itself. While the currency rose versus the dollar and yen – two general underperformers on the day – its balance was one of modest weakness. Between a 0.1 and 0.2 percent slip for the rest of the majors shows the pound was struggling for its own momentum. And, it will likely struggle again this session. Ahead, we have the Bank of England (BoE) rate decision. While central bank policy updates are usually favored trader fare, little – if anything – is expected from this group as they remain mum when they don’t change policy tack.

Yen Crosses Rebound as Risk Bounce Quiets BoJ’s Cap on QE

Realization that the Bank of Japan (BoJ) is not going to readily upgrade its stimulus effort without very provocation is setting in. Yet, when it comes to deciding whether the yen crosses will be left to drift or topple to close the value gap to fall more closely in line with yields, this is not a high-pressure driver. To reverse an 18-month bull trend and send USDJPY below 101 or EURJPY below 140, a more motivated spark is needed to push unwinding of this low-yielding carry build up. The most effective driver in this scenario would be a universal risk aversion move. With the Nikkei 225 holding 14,250 and S&P 500 jumping from 1,840, there is limited momentum to this call.

Australian Dollar Rally Extended by Upgraded Jobs, Inflation Data

Inflation and economic trends are still well off the pace necessary to elicit appraisals of robust growth and imminent rate hike potential in Australia, but the improvement is still meaningful for a currency attempting to return to carry form. This morning, two pieces of data were released: the Consumer Inflation Expectation survey for April and March unemployment figures. A rise in perceived price pressures to a 2.4 percent clip puts the measure back within the central bank’s target zone and further distances us to further cuts. Meanwhile, an unexpected drop in the unemployment rate to 5.8 percent may be skewed by a drop in the participation rate, a drop in full-time jobs and the fact that jobless rate is coming off a decade high; but yields are still up through it. The 2-year Aussie bond yield jumped to 2.85 percent.

China Yuan Slips Versus Dollar, Trade Data Improves

While China would raise the reference rate for the yuan exchange this morning to 6.1510, the currency’s performance is still remarkable. Despite the universal slip from the greenback this past session, the off-shore Renmimbi rate (USDCNH) would still advance. From January’s record low level, this exchange rate is still up 3 percent – substantial for a managed rate that has been touted as a one-way carry for many international investors. For data, the government reported its March trade figures this morning. The $7.71 billion surplus was better than the $1.80 billion positive read expected. Yet, the comparison to the second largest deficit on record (-$22.99 billion) reported in the previous reading is somewhat skewed due to the seasonal factor. Nevertheless, the unexpected drop in exports (6.6 percent) from a year ago is still a concern. Yet, hopes for stimulus likely still reside with financial issues (like defaults and liquidity crunches) than economic concerns.

Emerging Markets Have Risen for 13 Out of the Past 15 Trading Days

Emerging market currencies and capital market benchmarks are pushing higher. The MSCI Emerging Market ETF has tipped yet another five-month high and is now green on 13 of its past 15 trading days (three weeks). This has encompassed a 10.7 percent rally within that time frame. Meanwhile, the same segment’s sovereign bond index (from Bloomberg) has pushed a 10-month high of its own, while credit default swaps are back at lows for the year (271.6 bps). In tallying the FX performance, the larger EM currencies posted the best performance. The Korean Won is up 1.6 percent through this morning after the central bank held its benchmark rate, the South African Rand rose 0.8 percent and the Brazilian Real rose 0.8 percent versus the dollar.

Gold Advance Slows as Dollar Tumble Eases

Spot gold managed to squeak out a second consecutive gain Tuesday – the first back-to-back advance for the metal in four weeks – but confidence was visibly lacking. Where the physical and SPDR Gold Trust ETF rose 0.2 percent through the session, the active futures contract actually slipped 0.2 percent through the day. Furthermore, the gain measured versus the dollar evaporates when we measure the day’s performance in other currencies. For fundamental drive, general risk trends were aiming modestly higher and inflation expectations were relatively untouched for the day. The best source of drive would come from the dollar’s weakness – which matches momentum well.**Bring the economic calendar to your charts with the DailyFX News App.

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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